Creating a portfolio fit for future demands
Technology is often referred to as the disruptive force changing the way businesses work, how they drive efficiencies and what channels they use to reach consumers.
It’s changing many intangible aspects of the business, but how is it changing the physical products it delivers?
It’s easy for a consumer to look at a new smartphone to see it has a bigger screen, fancy rounded edges and a longer battery life. But the raw materials that make up that new product may not be as obvious. Behind it all, the technology driving new products and demand is also driving an increasing reliance on many of the basic resources mining and metals companies produce.
Let’s take the smartphone for example. It uses lithium-ion batteries. Cobalt is the critical component used in those lithium-ion batteries, which are also used in electric vehicles (EVs), laptops and personal computers – and likely more products to come.
Right now, approximately three out of four Canadians own a smartphone. While EVs are estimated to reach 13 million globally by 2020, and 130 million by 2030. The EY Canadian Mining Eye outlines that total battery consumption is expected to account for approximately 61% of global cobalt demand by 2022 – compared to the 49% we saw last year. That’s a predicted 22% jump in just five years.
On top of new product demands, there is also an increasing pressure on economies to move away from a reliance on fossil fuels and increase focus on more sustainable, renewable minerals. So what does this mean for mining and metals companies?
Management teams will need to actively review how changing demand for new and traditional commodities will fit into their portfolio, and consider when and where to start investing.
There’s great excitement around the potential for mineral supply in battery technology – battery metals transactions have started to pick up globally, with deal value for rare earth/lithium assets up by 22% year-on-year in the first half of 2018 – but many big players have yet to move into this space. Despite the sector’s appetite, companies remain cautious for the time being as they look for avenues toward strategic growth.
To do this, some mining and metals companies are turning to joint ventures (JVs) and strategic partnerships, while others are looking at options to acquire small projects and/or expanding existing projects. These are opportunities and challenges to consider for each route.
JVs can help spread the cost and risk of a project while enhancing a company’s portfolio and increasing access to resources like reserves, technology and capabilities. However, JVs have to be managed effectively in order to gain lasting value. Challenges arise with conflicting management culture, which can impact decision- making and result in prolonged timelines. That’s why project objectives and priorities need to be set from the get-go.
Strategic partnerships are ideal to gain access to knowledge and resources. Partnerships can aid in building better brand awareness while increasing access to new markets and customers. The challenge sits with finding the right partner with which to build a mutually beneficial relationship. Mining and metals companies looking to enter a partnership should be evaluating companies and/or industries that are complementary to growth plans that meet changing demands.
Acquiring existing projects gives access to an established customer base, talent and operations. It also alleviates much of the work involved with product development, hiring and financing. Mining and metals companies will need to make sure they are assessing the right synergies ahead of any deal. Failing to do so can lead to lost talent, production and innovation from the acquired.
It’s hard to predict the path of disruption, but having a solid understanding of the impact of changing attitudes and technologies will play a key role in predicting demand for new and traditional metals moving forward. In the meantime, mining and metals companies should be evaluating avenues for strategic growth that will position their portfolios effectively to respond to changing markets.
JAY PATEL is the EY Canada Mining & Metals Transactions Leader. He is based in Toronto. For more information, visit www.ey.com/ca/miningeye.
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